In its judgment of 31 July 2026 (8 SLa 603/25), Cologne Higher Labour Court held that the principles of limited employee liability developed by the German courts do not apply where there is D&O insurance funded by the employer. The employee, a senior executive who had fallen victim to a fraud scheme, was therefore liable for the full amount of the loss. The court also upheld the validity of his immediate dismissal. The decision is the first to clarify the implications of D&O insurance for limited employee liability under German law.
Facts
As Head of Global Treasury, the employee was responsible for the strategic and operational management of his employer’s financial resources. Even before the employment relationship began, the employer had taken out D&O insurance with cover of up to USD 150 million, under which the employee was insured.
As part of a CEO fraud scheme, fraudsters led the employee to believe that his supervisor was planning to establish a company in Asia and to appoint him as its Chief Financial Officer. Initial contact was made using his supervisor’s telephone number listed in the company telephone directory (“ID spoofing”). Additional payment instructions were sent to his personal mobile telephone via a messaging service. At no point did he personally verify the instructions with his supervisor. Over a period of 25 days, he initiated 59 transfers totalling more than EUR 50 million. After becoming aware of the incident, the employer terminated the employment relationship with immediate effect and asserted claims for damages.
Decision
Cologne Higher Labour Court found that the employee had acted with gross negligence and upheld the validity of his immediate dismissal. A financial manager at his level should have personally confirmed any payment instructions involving sums of this magnitude with his supervisor. The key issue addressed by the decision is the interplay between D&O insurance and employee liability. Although the amount of damages far exceeded the employee’s financial means, the Court declined to limit his liability and upheld the claim for damages in full:
- According to the Federal Labour Court’s (Bundesarbeitsgericht) settled case law, compulsory insurance takes precedence over the principles of limited employee liability, whereas private insurance voluntarily purchased by an employee at their own expense is to be disregarded. Cologne Higher Labour Court has now developed this case law further, stating that “whether insurance is made a condition of employment during contractual negotiations or whether the employer takes out the corresponding insurance for the employee at its own expense cannot make a difference”. Providing the employee with insurance cover and financing it in full was no different from contractually requiring the employee to take out insurance on their own behalf. The employer-funded D&O insurance therefore took precedence over the principles of limited employee liability in their entirety, including with respect to those transfers for which the Court found the employee to have acted only with ordinary negligence. The employee was therefore fully liable for all of the transactions, irrespective of the degree of fault.
- Although, liability may, in exceptional circumstances, be reduced even in cases of gross negligence if full liability would threaten the employee’s financial existence, Cologne Higher Labour Court saw no grounds for limiting liability where precisely this risk was covered by D&O insurance.
- The Court also made clear that the employee bears the burden of presenting and proving that the D&O insurance does not provide cover in the specific case. A mere assertion that confirmation of cover remains outstanding does not discharge this burden.
Assessment and practical implications
Cologne Higher Labour Court’s decision enters uncharted legal territory. Its rationale is clear: limiting the liability of employees in Germany protects them from financial ruin if claims are brought against them. Where D&O insurance against this risk is in place, the argument goes, there is no reason to protect the relevant employee by not holding them fully liable. What this line of reasoning overlooks, however, is that at the point in time when full liability is imposed on the employee, it is not yet certain – much less final – that the D&O insurance even covers the liability found to exist. This can only be clarified in subsequent coverage proceedings.
Whether the Federal Labour Court will confirm this approach remains to be seen. An appeal on points of law (2 AZR 164/26) is pending. Until the Federal Labour Court provides clarification, companies should note the following:
- Owing to the doctrine of limited employee liability, claims against employees have traditionally played only a minor role in major German liability cases, with claims against (former) board members having typically been much easier to pursue. The Cologne Higher Labour Court’s ruling may now change this. While the labour courts (which traditionally lean towards employees’ interests) will retain jurisdiction in these cases, the Cologne decision could now give rise to scenarios in which claims against employees covered by D&O insurance will become more attractive. Companies will need to take this into account when developing strategies in complex liability cases and weighing up the arguments for and against bringing a claim.
- Where D&O insurance agreements provide coverage for employees only within the scope of limited employee liability, this restriction should not adversely affect coverage because it is moot where limited employee liability does not apply in the first place.
- The case underscores the necessity of effective compliance measures against CEO fraud, notably strict approval procedures for payment instructions (dual approval requirements, reconfirmation using familiar channels of communication).
Forward
